Improving your credit score takes some elbow grease. Ruining it, on the other hand, is a piece of cake.
Just a few false moves -- a late bill payment, or a few too many credit inquiries -- and in no time, your credit reputation starts to suffer. Woe to the consumers who make a few missteps in a row and find themselves slogging through suboptimal loans the next time they're shopping for credit.
With the days of easy credit behind us -- and lenders scrutinizing consumers' credit-handling ways more closely than ever -- it's essential to keep your credit reputation up to snuff. (Or, if it's not there yet, to get it that way ASAP with this step-by-step guide that will help you fix your credit.)
The surest way to stay in the lending world's good graces is to follow the rules that matter most to the very folks measuring your creditworthiness. Here are five good credit habits that will keep you in good standing.
1. Put the check in the mail on time every time. You know late payments are a no-no. But, hey, it happens -- you're on the lido deck during your family getaway, and -- doh! -- you remember that the credit card payment was due three days ago. No big whoop, right?
Actually, you are right ... to a point. Credit card companies do have a heart -- well, OK, at least they offer a little leeway. They're usually willing to let a few missteps slide, particularly in how they treat 30- and 60-day late payments, provided you bring your payments up to date right away.
But if you make a habit of being late, prepare for some brutal consequences, since more than one-third of your FICO score is based on your bill-paying habits. According to Credit.com, a single 90-day late payment is as damaging as a bankruptcy filing, a tax lien, a collection, a judgment, or a repossession.
The lesson here is simple: Pay your bills on time. Don't skip any bills, especially not your rent or your mortgage payment. Send in just the minimum amount due if you have to, but send something in. If you know your payment will be late, call your lender and explain, and the lender might give you a free pass ... just this once.
2. Stay way below your credit limit. A bunch of bankers in suits have deemed you worthy of a spending limit of $5,000, $10,000, $20,000, or maybe even $40,000 on your credit cards! Time to start living the high life, right?
Come back to earth, Trump wannabe. Sure, you might have a $15,000 credit limit on your card, but that doesn't mean that's how much you can afford to spend. Even a temporary splurge could turn into long-term debt trouble if you're not careful.
Keep those cards in your pocket and avoid coming anywhere near to maxing out your credit cards. The measure of debt to your credit limits counts for a whopping 30% of your overall credit score. Keeping your spending to 30% or less of your limit is "acceptable" to the banking world. Red flags start waving when your debt-to-available-credit ratio exceeds 50%.
My advice is to keep your spending to less than 10% of your overall limits -- and, of course, to pay off the balance every month. If getting a loan is in your future, you'll want to shoot for that debt-to-credit ratio anyway.
3. Let those wrinkles show. Like a fine wine, your credit score improves with age. The longer your borrowing history -- particularly if you've been a responsible, card-carrying citizen -- the more you're trusted, and the better your score. So, stop covering those grays.
The length of time you've spent in the system determines 15% of your overall score. And don't forget that those lines of available credit factor into your debt-to-credit ratio.
Too many people cancel old credit cards when they start their spring cleaning and then are shocked when the cancellation negatively affects their credit score.
Celebrate and retain your credit history. If you're going to cancel some credit cards, start with newer accounts, since the old ones help establish your long and illustrious credit record. But even then, be careful: These days, lenders are lowering credit limits and closing accounts of even the most upstanding borrowers. It could happen to you, so you might want to keep those old cards active and open after all.
4. Remain faithful to your lender. Playing the field is tempting, particularly when someone else is offering a better deal than what you've got. But beware of the fallout from your unfaithfulness.
Lenders like loyalty. Think about it. If you lent someone money, you'd probably get nervous if that person started asking all of his or her other friends for a loaner, too. Lenders check your credit file regularly to see if you're dating around. If they see you applying for lots of credit at once, they tighten their purse strings and fire a few warning shots at your credit score. New credit applications, in fact, affect 10% of your credit score.
Also keep in mind that every line of credit you apply for will stay on your record for at least seven years, even if the account is open only for a day or two. So, take great care when opening and closing accounts.
If you're in a bad relationship with your lender -- for example, if your lender charges outrageous credit card fees -- the short-term credit-score blip you'll get from shopping around may be worth the long-term payoff. What's more, if you're trying to pay off debts, looking for the best credit card deal makes sense. Most of the time, though, you really should stick with what's already in your wallet.
5. Don't overcompensate to improve your credit score. Dressing to impress and picking up the happy-hour tab are classic tools to get ahead in some circles. The equivalent in credit scoring terms is showing off how good you are at juggling a variety of loans -- for example, installment loans like a car loan or mortgage, and revolving debt such as your workaday credit card. The types of loans you have affect 10% of your overall score.
However, padding your credit resume by trying to quickly add variety to your borrowing portfolio may make your reputation worse, not better. Remember, when you apply for loans, you'll experience a short-term drop in your score. And then there's the money -- paying interest or annual fees or other costs of borrowing just to add some cards to your credit portfolio.
Don't borrow money just to boost your score, and for heaven's sake, don't believe anyone who tells you that you have to carry a balance on your cards to prove your credit-worthiness. That's bunk.
There are just two things guaranteed to boost your credit score:
1. Time. (Remember, most bad marks fall off your report after seven years.)
2. The proper use of credit. (Responsible bill-paying habits matter most to those judging you.)